Hunter v. The Queen, docket 2000-3075(IT)G

Date: 20021127

Docket: 2000-3075-IT-G

BETWEEN:

WILLIAM B. HUNTER,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent,

AND BETWEEN:

2000-3076(IT)G

JANET MACFADYEN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Costs

Bell, J.T.C.C.

[1]            The appeal of William B. Hunter ("Hunter") with respect to his 1993, 1994, 1995 and 1996 taxation years and the appeal of his wife, Janet MacFadyen ("MacFadyen") with respect to her 1993, 1994 and 1995 taxation years were allowed immediately upon the completion of the hearing for the reasons then given. Counsel for both parties then made submissions respecting costs.

[2]            This was followed by a telephone conference with counsel for the Appellants and the Respondent, organized by the Court affording the opportunity of fuller presentations respecting costs.

[3]            A schedule of gross farm revenue, farm losses claimed and employment income in respect of each Appellant, attached to the Reply to the Notice of Appeal filed by the Minister of National Revenue ("Minister") is reproduced as follows:

Schedule A

	Gross Farm Revenue reported by Hunter	Farm Losses claimed by Hunter	Employment Income Hunter	Employment Income MacFadyen	Farm Losses claimed by MacFadyen	Gross Farm Revenue Gross reported by MacFadyen
1985		7,498* (gross farm loss)
1986		7,494* (gross farm loss)
1987	97,561	26,702	17,213	34,923
1988	165,023	66,790	20,036	40,333
1989	368,676	24,970	27,796	45,634
1990	218,704	40,990	33,849	66,224	40,990	68,072
1991	427,564	35,716	42,329	67,844	35,716	511,314
1992	332,466	42,819	41,943	60,769	42,819	332,466
1993	367,806	41,124	36,129	68,236	41,124	367,806
1994	379,306	13,644	34,335	48,237	13,644	379,306
1995	425,289	29,662	57,678	67,372	29,662	425,289
1996	298,914	48,348	48,673	70,879	48,348	298,914
1997	91,126	15,500	60,916	67,686	15,500	91,126
1998	33,121	8,109	54,773	55,761	8,109	33,121

[4]            The issues in the appeal of Hunter were set forth in the Reply to the Notice of Appeal as follows:

a)              whether the Appellant had a reasonable expectation of profit from the farming activity in the 1993, 1994, 1995 and 1996 taxation years;

b)             whether the Appellant's chief source of income was farming or a combination of farming and some other source of income during the 1993, 1994, 1995, and 1996 taxation years;

The issues stated in the Reply to MacFadyen's Notice of Appeal were identical except her 1996 taxation year was not under appeal and, therefore, not mentioned in the statement of issues.

[5]            It is clear from the evidence that the Appellants were not contacted by the Minister's representatives respecting a proposed reassessment at any time before the reassessment issued.

[6]            During the telephone conference, Appellants' counsel stated that the Appellants were not seeking Solicitor/Client costs. She advised the Court that the actual Solicitor/Client costs were $44,000 and that costs, including disbursements calculated under this Court's tariff would be $8,528.04. Counsel asked the Court to award costs in the sum of $25,000.

[7]            Each Appellant was reassessed, for the years under appeal, by Notices of Reassessment dated April 25, 1997.

[8]            A letter dated February 17, 1997 sent by Revenue Canada to Hunter[1] reads as follows:

We have reviewed the above-mentioned income tax returns and are proposing the following adjustments:

	1993	1994	1995
Farm Losses Disallowed	($41,124)	($13,644)	($29,662)

It has been determined that the farm operation above had no reasonable expectation of profit during 1986-1995. Factors that we have considered include the following:

- significance and growth of gross revenues over the years involved

- profit and loss experience over the years

- efforts shown to reduce costs and turn a profit

- devotion of time to the operation

The 1993 income tax return will become statute-barred on April 28, 1997 and for us to allow you the opportunity to present any additional information we will require a signed waiver for the 1993 taxation year. This form must be returned by March 14, 1997 in order for us to allow an extension to present additional information.

If this waiver is not returned by March 14, 1997 we will reassess the 1993-1995 income tax returns as outlined above.

If you have any questions regarding this review please contact the undersigned at 725-8125.

[9]            Appellants' Counsel said that Revenue Canada ("Revenue"):

... did not in any way inquire from the taxpayer as to a fact finding or an audit.

She then submitted that Revenue had made no inquiry respecting the Appellants' efforts to reduce costs and turn a profit and have sought no information respecting the devotion of Appellants' time to the operation. While admitting that the Appellants did not respond to this letter she submitted that only the 1993 taxation year would have become statute barred on April 28, 1997 and that the other years did not have to be reassessed at the same time as 1993.

[10]          Counsel also submitted that Revenue "would certainly be fully aware" of the substantial revenue figures in the years reassessed and also aware that the losses claimed were relatively modest in comparison with those gross revenues.

[11]          Counsel then, referring to the letter, submitted that the words "opportunity to present any additional information" were peculiar in that no information had been requested by Revenue prior to this letter.

[12]          Counsel then stated that there was no attempt to review the books of these taxpayers until shortly before the examination for discovery in May, 2002, years after the reassessment had been issued.

[13]          Counsel then referred to an offer made by Revenue to the Appellants shortly before the examination for discovery. It offered to settle the appeals on the basis of allowing restricted losses to the Appellants under section 31 of the Act, the reasonable expectation of profit concept being applied by Revenue Canada with no concession that a business was being conducted. Counsel described Revenue as saying, in effect:

Unless you accept this offer, we are going to proceed to appeal and to establish that there is no business at all.

[14]          She submitted that it had become clear, a Revenue agent having come to her office to examine the books and the examination for discovery having been completed, that the farming operation was a business. Respondent's counsel advised the Court that the agent was John Legros, the original auditor.

[15]          Counsel then stated that following the decision in Stewart v. Her Majesty the Queen, [2002] S.C.J. No. 46 on May 23, 2002 she served a Request to Admit on June 6 or 7 on Respondent's counsel requesting that the Minister "now admit that there was a business". She stated further that on June 21, 2002 she received a response from the Minister denying that request. The transcript of Appellants' counsel's comments in this regard reads as follows:

So, in essence, what I had asked, and I asked it in a number of different ways, I said "The farming activity engaged by the Appellants was undertaken by the Appellant in pursuit to profit; would you admit that?" No.

"Would you admit that the farming activity engaged in those years constituted a business?" Answer, no.

....

And I asked them to admit that the farming activity engaged constituted commercial activity ..." No. And I asked them, "Was (sic) the farming activity engaged constitute a source of business income for the purposes of the Income Tax Act?" No.

Counsel then said that what she was trying to do was to

... get that reasonable expectation of profit issue off the table so we could narrow the issues on appeal.

...

to be restricted to the combination argument.

She stated that that would mean that the Appellants would be proceeding with the appeal knowing that they would be allowed restricted farm losses and not be at risk "for losing the whole thing, which was a major concern".

[16]          Appellants' counsel then stated that in the week prior to the appeal she sent an e-mail to Respondent's counsel asking whether she was maintaining the position with respect to each Appellant's reasonable expectation of profit "or, was she prepared to lift it at that point and I didn't get a positive response then". Counsel then said:

"and then I received instructions ... on September 20, to make a counter-offer, because ... even though they were confident ... that their position was right, they were being extremely anguished by the risk, that if they lost, that they might not be able to recover from the loss. I was instructed to try to offer a compromise that at least they could live with, which is at that point, on September 20, we offered restricted farm losses for Janet and full farm losses for Bill.

...

And then on September 24, which is the day before the appeal, Revenue rejected that offer. ...

Counsel for the Appellant then said that Revenue made another offer, namely full losses for Bill and no losses for Janet. On September 24, she advised the Court that that involved basically the same amount of money as restricted losses for both Appellants would have produced. The Examination for Discovery had taken place shortly after Revenue's review of the records. Counsel then advised that Respondent's counsel, in the early afternoon of September 24, the day before the hearing, called her and stated that Revenue would not be maintaining its position with respect to reasonable expectation of profit and would be proceeding on the basis that the appeal should be allowed on the restricted loss basis.[2]

[17]          At this point, Respondent's counsel intervened stating that "the question of profitability and whether there are substantial profits were significant to us and that was from the reasoning in the Donnelly decision." The transcript then reads as follows:

THE COURT:         So you wouldn't give up talking about reasonable expectation of profit?

MS. FARRELL:      That's correct.

THE COURT:         Even in the face of the Stewart case?

MS FARRELL:       That's correct. Well, I mean we certainly accept what the Stewart case says and - well, I'll speak more when - is now the right time, or?

THE COURT:         No. We can get back to that. I mean, you raised this in court.

MS. FARRELL:      Yes.

[18]          In summary, Appellants' counsel said:

It's the submission of the Appellants that this matter should not have proceeded to appeal, should not have been assessed initially, and certainly should not --- the issues that were maintained should not have been maintained as long as they were, or at all.

As a result of that, the client has been put to considerable costs, and in these circumstances on the authorities that are reflected dealing with the costs issues, even in the most recent one of Finch, that it warrants an amount higher than the tariff, and it would justify an award of $25,000, in light of the fact that the ... solicitor and client are in excess of $44,000.[3]

Counsel then stated there had been misconduct in the assessment without audit, undue delay and inappropriate prolongation of the proceedings. Counsel said that there was an application to extend the time for appeal in this case "and, in fairness, that can't be visited on Revenue". She then explained that a farm business consulting firm, the Appellants' tax preparer, had failed to file the appeal.

[19]          Counsel also submitted that:

If there was any issue prior to Stewart, there certainly wasn't an issue after Stewart...

about ... whether this was a business.

She also referred to the Request to Admit saying that it was an opportunity to streamline issues and reduce costs for the litigants and should be a factor in the determination of costs because there was a refusal to admit something that should be admitted, the admission finally having been obtained as late as the day before the hearing.

[20]          Counsel then read paragraph 33 of the Notice of Appeal which reads as follows:

By way of a notification of confirmation by the Minister dated May 13, 1999 the reassessments of the Appellant were confirmed on the basis that: "You have not shown that you made or incurred the expenditures of $48,348.89 in the 1996 taxation year; $29,662 in the 1995 taxation year; $13,644 in the 1994 taxation year and $41,124 in 1993 taxation year to gain or produce income from a business or property. Therefore, you cannot deduct these amounts from income according to paragraph 18(1)(a). There was no "non-capital loss" as defined in subsection 111(8) for the 1990 taxation year that was deductible in computing the taxable income for the 1994 taxation year."

Counsel stated that a similar paragraph appeared in MacFadyen's Notice of Appeal.

[21]          Respondent's counsel said that the May 9 letter offer of restricted losses was not rejected by the Appellant until September 19. She then said:

Conduct prior to the commencement of a proceeding typically is not to be taken into account for costs, and I would suggest that that was everything that happened before the Notice of Appeal.

When pressed for authority for that statement she referred to Alemu v. The Queen. This is reported in 99 DTC 591 under the reference McGorman et al v. The Queen.

She then said:

The cost award is typically - and I'm only saying "typically", because if you determine that the conduct is sufficiently egregious, you can go back, but that an award of costs looks at, typically, the conduct of the litigation, the conduct of the hearing, and in income tax matters, that begins with the filing of a Notice of Appeal.

...

The facts of it, I don't know, Your Honour, and I can get back to you. But it simply says that, that conduct prior to the commencement of a proceeding should not be taken into account.

[22]          In response to the Court's comments that no audit had been conducted before the reassessments in this case Respondent's counsel said:

... In this era a desk audit done on these facts was not particularly uncommon. There were many many years of losses with taxpayers who had a source of income from somewhere else. Based on that evidence alone -- and my friend said they didn't have any, they weren't able to look at anything with just the returns; but our position is they certainly had enough on the returns to make that call.

The question of whether they actually changed their mode of life, so that the chief source of income was now farming, is a determination of fact, Your Honour. That is an appropriate thing to bring before the Court, when they have such a heavy amount of evidence in terms of the numbers which would be against that.

The transcript continues:

THE COURT:         Let me ask you for your response to this, and I commented on this at the trial. It is not appropriate for the audit branch to obtain the facts before issuing an assessment?

MS. FARRELL:      Your Honour, we would say that we had sufficient facts to make the assessment, based on the losses and the other source.

THE COURT:         Well, yes, but there was no discussion with these people, there was no attempt to look at the operation to know the history of it. It was simply numbers that were in income tax returns and financial statements. So I just want your comment on that because nothing outside of that had been done until the time we heard about it from Ms. Webster.

MS. FARRELL:      I would accept what you're saying, Your Honour, except for the fact that Revenue would suggest that it was the numbers, plus the request for more information and the waiver; and since the waiver wasn't signed, then they assessed.

THE COURT: .... You're suggesting the numbers were enough?

MS. FARRELL:     Yes, Your Honour.

[23]          In response, Appellants' counsel said that the delay in responding on September 19 to the May offer was based on the fact that the Appellants were seeking information from Revenue Canada as to tax outstanding. Counsel continued that the taxpayers felt firmly that they were right and that they had to look at whether they could survive economically and needed to figure out what that offer meant. She stated that while she requested that information in May, to get a statement of account, the information was not forthcoming until the beginning of August. She said it took quite a bit of time for the accountants to try to figure out what that offer meant because they were using Revenue Canada's accounting procedures. She said this accounted for the delay until September 19.

[24]          Appellants' counsel then stressed the fact that the Appellants made an offer in writing prior to the appeal, that this offer was more favourable to the Respondent than the decision on appeal and that that offer had been rejected. Counsel underlined this point by stating that all costs incurred by the Appellant subsequent to making that offer were:

... occasioned because Revenue would not accept what obviously would have been a very good offer for them to have accepted.

               

[25]          Appellants' counsel submitted that the litigation could have been shortened, if not avoided, by the admission of the existence of business or by the acceptance of the aforesaid offer. She added that while Respondent's counsel had argued that the conduct of the assessment which had happened prior to the appeal should be irrelevant:

... the Revenue decided to maintain their position after the appeal on the same basis, without any audit or investigation, or any attempt to discern whether their position had any merit.

[26]          Respondent's counsel then said that:

One of the factors for you to look at is the complexity of the issues and whether there was conduct of party which tended to shorten or lengthen the proceeding. And I'm saying, as long as we're still talking about profit, which we needed to do because of the comments in Donnelly.

...

The evidence from the taxpayer about their intention to pursue profit in the --- whether they had a desire to --- or could have made substantial profits but for certain setbacks, which Donnelly said was incumbent upon the taxpayer to show ---

...

But what I'm suggesting is, many times in this telephone conversation my friend has suggested that the Minister ought to have known something because of Stewart or should have known something because of Stewart.

And, clearly, we were still at the trial. So a very good question is why were we there.

...

And you know, certainly we understood certain - all of the elements of the case. The factual information that was before you wasn't new to us. But we needed the Court's determination on some of those things.

This is a particularly important case because it was the first farm loss post-Stewart, and the result of that case will, hopefully, be informative to the CCRA afterwards.

The only reason I wanted to make the point, Your Honour, was because I don't believe - it's my submission that the length of the trial wouldn't really have changed because we needed to pursue that avenue.

The transcript then reads as follows:

THE COURT:         You say you needed to pursue it, and I am still puzzled by why that needed to be pursued. Is it because Donnelly was the only straw at which Revenue could grasp? What was the reason for that? I never fully received an answer from you on that at the hearing, and it will assist me in this if you can do that.

MS. FARRELL:      That is certainly one way to look at it, that Donnelly was the only straw to grasp. I would characterize it as saying that, when we looked through the cases, we saw these statements which made good sense to us and supported our position; and if they were not correct, then we needed to hear that from the Tax Court.

THE COURT:         Well, you're not telling me what that position was.

MS. FARRELL:      That it was incumbent upon the taxpayer to be able to explain how they would have been profitable, and if they had set backs that caused them to be in a loss position, what those set backs were.

And you'll recall, Your Honour, that my friend didn't offer that evidence, really, in direct, but I cross-examined on it, because I didn't want to end up arguing and laying all of our eggs in that already weak basket. But that was the issue that we needed determination on.

THE COURT:         But what's that got to do with substantial profit in the context of the Donnelly case? I'm missing your point. Because it seems to me what Revenue wanted you to do is to make an argument of some sort, and that's what they found. I'm incredulous at the suggestion that the word "substantial" would found an argument.

MS. FARRELL:      Donnelly did not just say substantial profits, Your Honour, and you'll recall that I did read that passage. But the passage that I was particularly concerned about was that statement that the taxpayer was required to demonstrate why they would have been profitable but for the setback. And then our discussion sort of got into the substantial - the language of substantial that was in there.

So, perhaps to help, there were two points in Donnelly, the substantial profits, you'll recall you asked me why it was in there, and I said I don't know and I'm not sure they're right. That wasn't the point. The point was the other part.

THE COURT:         Let me say that you seem to think that the Appellants were required to show why they would be profitable. Wasn't it kind of evident, from all the facts that were produced, that it was not profitable for certain reasons during the years under appeal?

MS. FARRELL:      It became so, yes, Your Honour.

THE COURT:         Yes, And it was quite evident that it is now a profitable operation. So, it seems to me that a garnering of those facts by Revenue in advance of an assessment would have cast a different light, one hopes, upon its decision to reassess as it did. That's what I was puzzled about at the hearing, and I think you've given me your answer to it.

Is there anything else you'd like to say?

MS. FARRELL:      No. Thank you, Your Honour.

CONCLUSION

[27]          Section 147 of the Tax Court of Canada Rules (General Procedure)("Rules") reads, in part, as follows:

147.          (1) Subject to the provisions of the Act, the Court shall have full discretionary power over the payment of the costs of all parties involved in any proceeding, the amount and allocation of those costs and determining the persons by whom they are to be paid.

(2) Costs may be awarded to or against the Crown.

(3) In exercising its discretionary power pursuant to subsection (1) the Court may consider,

(a) the result of the proceeding,

(b) the amounts in issue,

(c) the importance of the issues,

(d) any offer of settlement made in writing,

(e) the volume of work,

(f) the complexity of the issues,

(g) the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding,

(h) the denial or the neglect or refusal of any party to admit anything that should have been admitted,

(i) whether any stage in the proceedings was,

(i) improper, vexatious, or unnecessary, or

(ii) taken through negligence, mistake or excessive caution,

(j) any other matter relevant to the question of costs.

(4) The Court may fix all or part of the costs with or without reference to Schedule II, Tariff B and, further, it may award a lump sum in lieu of or in addition to any taxed costs.

[28]          In RCP Inc. v. MNR [1986] 1 F.C. 485, Rouleau J., in discussing the award of costs, said:

Though the Applicant has satisfied me of bad faith, that it was unfairly dealt with and the conduct of the Department's officials was not beyond reproach, this conduct does not persist after the commencement of the proceedings in January 1984.

and

Costs can only be considered from the time litigation is initiated.

[29]          Later, the learned Justice, after taking into account the circumstances of the case before him said he was satisfied that they amply justified an increase in the amount over and above those set out in the tariff. He stated further:

I am satisfied that in this case I can take into account the previous conduct of the respondents which led to this litigation and it is my duty to consider the whole of the circumstances of the case and what led to the action, the necessity of lengthy cross-examinations of witnesses and the unusually prolonged argument for costs. For these and other reasons already outlined, I will exercise my discretion and fix a lump sum.

Apparently he meant that the previous conduct justified only his conclusion of fixing a lump sum because he continued as follows:

The bill itself does not seem to include any amounts for time spent prior to the commencement of the action. If such were the case, I would delete them. As I interpret the bill of costs, the time docked does appear reasonable for the services rendered and I find as a fact that the hours claimed were from the time litigation was contemplated. The total bill for professional services and time spent up to the launching of this motion amounts to $20,000. I fix and allow this sum at $10,000.

No authority is cited for the statement that costs can only be considered from the time litigation is initiated.

[30]          In Murano et al v. Bank of Montreal, 41 O.R. (3d) 222, the Court of Appeal of Ontario [1998] O.J. No. 2897, said that the following considerations should be helpful:

1)              A judge should not fix costs on his or her own motion. If a judge is minded to fix costs, or if one party asks the court to do so, the parties should be given the opportunity to make submissions on whether costs should be fixed

2)              With due respect to the contrary view expressed by Henry J. in Apotex Inc. v. Egis Pharmaceuticals (1991), 4 O.R. (3d) 321 at p. 322, 37 C.P.R. (3d) 335 (Gen. Div.), I do not think that a judge has an unfettered discretion to fix costs. The power should only be resorted to when the judge, having received the parties' submissions, is satisfied that he or she is in a position to do procedural and substantive justice in fixing the costs instead of directing that they be assessed by an assessment officer.

3)              Having decided to fix costs, the judge should, of course, conduct an appropriate hearing on the question of the amount to be fixed.

....

There was considerable discussion on whether costs should be fixed or assessed and also a discussion with respect to solicitor/client costs. Those are not issues in this appeal since solicitor/client costs are not requested and the Rules of this Court specifically provide for the court awarding a lump sum in lieu of or in addition to any taxed costs.

[31]          In E.F. Anthony Merchant v. Her Majesty the Queen, 98 D.T.C. 1734, Bowman, J., as he then was, said:

Generally speaking, conduct prior to the commencement of the action is not relevant to the award of costs. The rule is not invariable.

He then described Merchant's deliberate frustration of the audit process and objection process, his conduct prior to commencement of the appeal and prior to trial, causing a trial that was excessively lengthy and Merchant having achieved no more success at trial than he could have achieved at the audit, objection or discovery level had he not seen fit to obstruct the orderly process laid down in the Income Tax Act and this Court's rules. In that case, the court awarded costs against Merchant on a solicitor and client basis. The Federal Court of Appeal upheld that decision in Merchant, 2001 D.T.C. 5245 with, at least, tacit approval of consideration of conduct prior to the commencement of the appeal. The court said at paragraph 4:

We agree with this award of costs on a solicitor-client basis. The taxpayer's conduct was unacceptable and frustrated a proper audit of his claims with the result that a motion for disclosure became necessary.

[32]          Respondent's counsel's reference to McGorman (supra) is not particularly helpful because that decision was made in the context of a request for solicitor/client costs. However, in McGorman, Bowman, J. as he then was, in discussing the matter of costs, said, at 593:

... the mere fact that a case is novel, unique, complex or difficult, or that it involves a great deal of money is not a reason for departing from the tariff, which, generally speaking, should be respected in the absence of exceptional circumstances. ...

Was there any conduct by the Minister at the assessing or appeals level warranting the award of solicitor and client costs? It is not an inflexible rule that conduct prior to the commencement of a proceeding may not be taken into account in the award of costs, but the conduct must be exceptional.

[33]          In R. v. Veldman, 92 DTC 1334, a three member panel of this Court, in reviewing the costs award by another judge of this Court said:

We find that the scope of a judge in this Court to award an amount in excess of the tariff of party and party costs set forth in the Court Rules which govern this matter is similarly circumscribed. Such a sum should only be awarded in relation to matters connected with the litigation since subsection 5(2) specifically states that such fixed sums shall be "in lieu of taxed costs".

A footnote to Veldman states that:

A party is only entitled to costs for litigation which, in income tax appeals, commences with the Notice of Appeal. Negotiations with the Respondent prior to assessment, the preparation of a Notice of Objection and similar matters are not items to which counsel is entitled to costs.

These comments arise in respect of the rules of what became known as the "Old Procedure", namely that pertaining in this Court prior to the institution of the Informal Procedure and the General Procedure. The decision was based upon an interpretation of the wording of subsection 5(2) of the Tax Court of Canada Rules of Practice and Procedure for the Award of Costs (Income Tax Act) which, by virtue of then section 29 of the Tax Court of Canada Act, 1980-81-82-83, c. 158 made that section applicable. Section 29 read as follows:

All rules regulating the practice and procedure before the Tax Review Board at the time this Act comes into force shall, to the extent that they are not inconsistent with this Part, remain in force until revoked or altered by the Court under section 21 or until otherwise determined.

[34]          Subsection 5(2) referred to above reads as follows:

A judge may direct the payment of a fixed sum in lieu of taxed costs.

Now, however, the Rule as to costs in the General Procedure is not so limited but gives this Court the broad scope that is described in Rule 147 above quoted. It is to be noted that Rule 147 speaks of the Court's discretionary power over the amount of costs. This differs from the provisions of Rules 153 and 154 with respect to the taxing officer's power in respect of the taxation of costs.

[35]          In the present case the motion for costs of $25,000 was made by Appellants' counsel. Counsel for both parties were afforded the opportunity to advance their views respecting the Appellants' costs request.

[36]          Whether or not the actions or omissions of the Respondent before the Notice of Appeal was filed are to be taken into account in fixing costs, the Respondent's reassessment behaviour continued after the appeal was commenced. With one exception, no Revenue official contacted the Appellants before or after the reassessment of the years under appeal, that exception being the letter of February 17, 1997 advising that one year would soon become statute-barred and asking for additional information. No visit to the premises of the Appellants was ever made and no interview of the Appellants was ever conducted. Respondent's counsel said that the hearing was necessary in order to find out how the Appellants expected the operation to become profitable. Questions relating to that matter could have been posed by Revenue on personal interview with the Appellants before or after reassessment or upon the examination for discovery. Although no portion of the examination was produced at the hearing, it appears, from Respondent's counsel's statement aforesaid that such interrogation did not take place. Respondent's counsel stated that Revenue "certainly had enough on the returns to make" the assessment. The losses claimed by the Appellants could have been examined in the context of the gross revenue which could only have been done by dialogue with the Appellants either before or after reassessment. For example, the loss claimed by each Appellant in 1993 was $41,124, the gross farm revenue for that year being $367,806. The loss claimed by each Appellant in 1994 was $13,644, the gross farm revenue for that year was $379,306. In 1995 the loss claimed by each was $29,662, the gross revenue being $425,289. The Revenue letter of February 17, 1997, being the only communication with the Appellants stated "that it had considered inter alia, the Appellants' efforts shown to reduce costs and turn a profit" and "devotion of time to the operation". According to the evidence, these statements are not accurate. Failure of Revenue to obtain that information continued after the reassessment. Revenue made no attempt to review the books of the Appellants until shortly before the examination for discovery in May, 2002.

[37]          In the Reply to the Notice of Appeal respecting each Appellant, the following statements are made:

In so assessing the Appellant, the Minister relied on, inter alia, the following:

during the 1993, 1994, 1995 and 1996 taxation years, the farming operation could not reasonably be expected to provide the bulk of income or centre of work routine for Hunter or MacFadyen;

notwithstanding the significant losses, Hunter and MacFadyen have not demonstrated that they have plans to alter the manner or type of farming operation from that of its present undertaking;

the land acquired during the period in issue was primarily for the purpose of producing capital gains and not for the purpose of earning farm income.

These were words only with absolutely no evidence to support their factual content. Revenue Canada, not having sought same, before its assessment or after the institution of these appeals, was simply without knowledge in respect of those areas.

[38]          The decision in Stewart (supra) dealt with the concept of "reasonable expectation of profit" being essential for the existence of "business". The court said, at paragraph 38:

Indeed, equating the term "business" with the phrase, "reasonable expectation of profit" does not accord with the traditional common law definition of business, which is that "anything which occupies the time and attention and labour of a man for the purpose of profit is business".

I add, with respect, that the term "reasonable expectation of profit" clearly does not accord with the definition of business in the Act, the pertinent part of which reads:

"business" includes a profession, calling, trade, manufacture or undertaking of any kind whatever and ... and a venture or concern in the nature of trade ...

The Supreme Court found that where the nature of an activity is clearly commercial the pursuit of profit is established and there is no need to analyse further the taxpayer's business decisions.

[39]          Two weeks after the issue of that decision, Respondent's counsel served a Request to Admit on Respondent's counsel. It, in Appellants' counsel's words, "was to request that the Minister would now admit that there was a business." She said her reason for so doing was that:

... obviously the type of evidence that I have to bring forward at appeal is much more extensive if we're arguing business and everything else.

[40]          Section 130 of the Rules provides that:

A party may, at any time, by serving a request to admit, request any other party to admit, for the purposes of the appeal only, the truth of a fact or the authenticity of a document.

While the determination sought was not technically "the truth of a fact", the Minister's response denied the request. The Court has neither a copy of the Request to Admit nor of the Response to Request to Admit. The Court has no information about the basis of the response but it seems clear that the Minister did not agree that the Appellants' operation constituted a business, even after the issue of the Stewart decision. The refusal so to admit required Appellants' counsel to prepare for the trial of that issue. As counsel stated, such admission would have restricted the trial to the chief source of income argument and, further, the taxpayers would have known that they were not at risk of losing the entire appeal. She said that this was a major concern to them. In spite of the fact that Appellants' counsel contacted Respondent's counsel by e-mail in the week prior to the appeal asking again whether the Respondent would agree that there was a business, a positive response was not received until the day before the hearing.

[41]          I will now comment on the factors set forth in Rule 147(3) and their applicability to this case. That section provides that in exercising its discretionary power over the amount of costs, the Court may consider the following:

(a)           the result of the proceeding

The result was that both Appellants won their appeals.

(b)           the amounts in issue

The Court was advised that the amount of tax and interest was close to $100,000.

(c)           the importance of the issues

The issue of reasonable expectation of profit being necessary to constitute a business was very important. Further, the issue of whether the Appellants' chief source of income was farming or a combination of farming and some other source, was very important.

(d)           any offer of settlement made in writing

The evidence established that the Appellants' written offer of settlement to the Respondent was rejected. This Court's decision to allow the appeals was substantially more beneficial to the Appellants and, accordingly more detrimental to the Respondent than would have been the case had the Appellants' written offer been accepted.

(e)            the volume of work

The Respondent, not having conceded that the Appellants were conducting a business until the day before the hearing, caused substantially more work for Appellants' counsel in preparation of the trial of that issue.

(f)             the complexity of the issues

The complexity of issues involved in section 31 of the Act respecting farm losses is known to every counsel and every judge who has been obliged to interpret and apply same. This complexity, in recent years, was increased by the concept of reasonable expectation of profit being essential for the existence of a business. That concept was an over nurtured warhorse whose feed supply was, mercifully, curtailed by the land's highest court. It is apparent from reviewing the facts stated above that the Respondent in this case refused, steadfastly, until the day before trial, to acknowledge the import of the Stewart decision.

(g)            the conduct of any party that tended to shorten or lengthen unnecessarily the duration of the proceeding

The Minister failed, as set out above, to obtain pertinent facts and to apply relevant judicial decisions thereto. His having doing so could well have resulted in the acceptance of the Appellants' written offer or the allowing of the appeals in toto.

(h)            the denial or the neglect or refusal of any party to admit anything that should have been admitted

The Respondent's refusal to acknowledge the authority and applicability of the Supreme Court of Canada's decision in Stewart until the day before the hearing, as described above, speaks for itself.

(i)             whether any stage in the proceedings was improper, vexatious, or unnecessary or taken through negligence, mistake or excessive caution

It follows from the foregoing, in my opinion, that the preparation for one of the issues at trial, respecting the reasonable expectation of profit concept, was unnecessary. Indeed the hearing itself could be said to be unnecessary.

(j)             any other matter relevant to the question of costs.

The following paragraphs relate to the question of whether an award of costs can take into account "conduct prior to the commencement of an action". The appeal of an income tax matter is unlike normal litigation in which, except in limited and defined circumstances, no formal procedures precede the commencement of an action.

The taxation of income in Canada is based upon a self-assessing system in which a taxpayer sets forth his income from all sources and in which that taxpayer is entitled to appropriate deductions, exemptions and credits. When the Minister disputes or challenges the accuracy of such statement filed by a taxpayer a reassessment[4] may be made. In a case such as this the Minister, through an auditor or auditors, would normally be expected to contact the taxpayer with questions of concern described above. No such contact was made in this case before the issue of the reassessment other than the letter of February 17, 1997 referred to above advising the Appellants of the Minister's determination that the farm operation had no reasonable expectation of profit during 1986-1995. It went on to say that factors considered by Revenue Canada included efforts shown to reduce costs and turn a profit and devotion of time to the operation. There is absolutely no evidence to support this assertion. No conversation of those two subject matters had been held with the Appellants. There is no evidence as to why this letter produced no response from the Appellants. They were, evidently, not then represented by the counsel who conducted the litigation of these appeals.

The Act provides machinery for a taxpayer objecting to a reassessment by filing a Notice of Objection. This is not filed in this Court but is served on the Minister. It is, however, a statutorily prescribed step, without which the formal step of filing a Notice of Appeal cannot be taken. That taxpayer can file a Notice of Appeal after a certain period of non-response by the Minister to the Notice of Objection or after the Minister's response to the Notice of Objection by confirming the reassessment or issuing another reassessment.

It may be that filing a Notice of Objection is a step in the litigious process. The Oxford English Dictionary, Second Edition, defines "litigious", in part, as follows:

Open to dispute or question; disputable, questionable; productive of litigation or contention.

The word "litigate" is defined, in part, as:

To be a party to, or carry on a suit at law; to go to law. Also ... to dispute

The word "litigation" is defined, in part, as:

The action or process of carrying on a suit in law or equity; legal proceedings; ...

The practice of going to law

Indeed, differing from ordinary lawsuits, the tax litigation process may well commence when an audit is being conducted. It is desirable, if not in some cases essential, that, at that point, issues be defined, solicitor client privilege be considered, the selection and delivery of documents be considered and recorded and a number of other factors be analysed before the formal step of filing a Notice of Objection.

[42]          The costs herein awarded have not been determined on the basis, in the words of Rouleau, J.:

"for time spent prior to the commencement of the action."

He also said:

"Costs can only be considered from the time litigation is initiated."

Nor have they been determined, in the words of Bowman, J., on the basis of:

"conduct prior to the commencement of the action"

which he states is generally not relevant to the award of costs. His qualification was that such rule is not invariable.

One could argue that the commencement of an action, in the sense of filing a Notice of Appeal, when determining costs, is not the beginning point for consideration of a party's conduct. In any event, in this case the Respondent's behaviour before the Appellants filed a Notice of Appeal, continued after that time. As set out in the Notice of Appeal, the Notification of Confirmation by the Minister informed the Appellants that expenditures in certain amounts were not made or incurred to gain or produce income from a business or property and that there was, therefore, no non-capital loss. The Minister maintained this position after the Notice of Appeal was filed. Although the auditor visited Appellants' counsel's office to review documents, he did not interview the Appellants or visit their premises to obtain information which ultimately proved vital to a resolution of the issues.

[43]          For the reasons stated above, I have decided to award one set of costs, inclusive of fees and disbursements, payable by the Respondent to the Appellants forthwith in the sum of $22,000.

Signed at Ottawa, Canada this 27th day of November, 2002.

"R.D. Bell"

J.T.C.C.

COURT FILE NO.:                                                 2000-3075(IT)G

STYLE OF CAUSE:                                               William B. Hunter

v. Her Majesty the Queen

PLACE OF HEARING:                                         Ottawa, Ontario

DATE OF HEARING:                                           October 1, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge R.D. Bell

DATE OF JUDGMENT:                                       November 27, 2002

APPEARANCES:

Counsel for the Appellant: Kelly L. Webster

Counsel for the Respondent:              J. Michelle Farrell

COUNSEL OF RECORD:

For the Appellant:                

Name:                                Kelly L. Webster

Firm:                  Thompson Corbett Webster LLP

                                                                                                London, Ontario

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2000-3075(IT)G

BETWEEN:

WILLIAM B. HUNTER,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on common evidence with the appeal of Janet MacFadyen

(2000-3076(IT)G) on September 25, 2002 at London, Ontario, by

the Honourable Judge R.D. Bell

Participants

Counsel for the Appellant:                  Kelly L. Webster

Counsel for the Respondent:                              J. Michelle Farrell

JUDGMENT

                The appeal from the reassessments made under the Income Tax Act ("Act") for the 1993, 1994, 1995 and 1996 taxation years are allowed, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment.

                Costs are awarded to the Appellant in accordance with the attached Reasons for Costs.

Signed at Ottawa, Canada this 27th day of November, 2002.

"R.D. Bell"

J.T.C.C.

2000-3076(IT)G

BETWEEN:

JANET MACFADYEN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on common evidence with the appeal of William B. Hunter

(2000-3075(IT)G) on September 25, 2002 at London, Ontario, by

the Honourable Judge R.D. Bell

Participants

Counsel for the Appellant:                  Kelly L. Webster

Counsel for the Respondent:                              J. Michelle Farrell

JUDGMENT

                The appeal from the reassessments made under the Income Tax Act ("Act") for the 1993, 1994 and 1995 taxation years are allowed, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment.

                Costs are awarded to the Appellant in accordance with the attached Reasons for Costs.

Signed at Ottawa, Canada this 27th day of November, 2002.

"R.D. Bell"

J.T.C.C.